The 2016 outlook for (Persian) Gulf Cooperation Council banks is negative. Oil price weakness is slowing economic growth and this is taking its toll on bank liquidity and earnings, according to Fitch Ratings.
In a report the global ratings agency said it expects Oman’s GDP growth to slow to 2.7% in 2016, against the 3.4% growth estimated this year, Albawaba reported.
Fitch said that around 70% of the (P)GCC’s GDP is driven, direct or indirectly, by oil and its 2016 forecast Brent oil price is $55 per barrel.
Fitch forecast slower economic growth for most of the six-nation (P)GCC (Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain, and Oman) in 2016. Kuwait is an exception where growth of 3.5% will be supported by strong public spending.
“We expect a notable economic slowdown in Saudi Arabia, where we forecast GDP growth falling to 1.9% in 2016 (from 4% in 2015), Qatar (2016 GDP growth at 3.7% against 4.3% in 2015) and Oman (2016 GDP growth at 2.7% against 3.4% in 2015). A modest downturn is forecast for Bahrain and the UAE,” Fitch Ratings said.
Fitch said that 16% of its ratings assigned to (P)GCC banks are on negative outlook, with the bulk of these concentrated in Saudi Arabia.
“(P)GCC bank ratings are largely driven by sovereign support because enactment of resolution legislation is a long way off and, in our opinion, these countries still have strong ability and propensity to support their banking systems.
The outlook for Saudi Arabia’s sovereign rating is negative and the country’s commodity dependence is much higher than for peers. Banking sector assets represent 70% of GDP, which is low and we think the sector’s standalone ability is high. But as the sovereign draws down foreign assets to finance its deficit, state ability to support banks may come under pressure,” Fitch said.
Liquidity Under Pressure
It said liquidity positions across the (P)GCC banks are adequate but these are coming under pressure because public-sector deposits are falling, in line with oil price weakness.
“Saudi Arabia and Oman started to tap the domestic capital markets in 2015, with take-up largely by domestic institutional investors. This has diverted liquidity away from the banks. Deposit outflows will result in higher bank reliance on more costly debt issuance and borrowings across the region.”
The report said that the banking performance indicators are likely to come under pressure across the region, impacted by lower credit demand and rising funding costs.
“But the banks are and will remain profitable, achieving an average operating return on equity of 14% the first half of 2015, driven by wide margins which range from 2 to 3.5%.”
Loan Growth Strong
According to Fitch, regional loan growth is still strong, averaging 13% during the first half of 2015, with the exception of Kuwait where credit expansion hovered between 5 to 7% in recent years.
“We expect capital levels to remain sound for rated (P)GCC banks. The biggest threat to loss absorption capacity is, in our view, single-name exposure risk, but we are not aware of any new significant problem loans at our rated banks,” it added.
Fitch Ratings has also revised Bahrain’s outlook to negative from stable and affirmed its long-term foreign and local currency Issuer Default Ratings at ‘BBB-’ and ‘BBB’, respectively.
The issue ratings on Bahrain’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BBB-’ and ‘BBB’, respectively. The agency has simultaneously affirmed Bahrain’s Country Ceiling at ‘BBB+’ and short-term foreign currency IDR at ‘F3’.
